Sliding into Morass

Dr. Santosh Kumar Mohapatra*

According to Carmen M. Reinhart, chief economist of the World Bank, the Covid-19 pandemic continues to deliver many moments of unwanted drama, including soaring infection rates, widespread lockdowns, record-shattering declines in output, and spiking poverty. But, in addition to these trends, a quieter crisis is gaining momentum in the financial sector. Even without a Lehman moment, it could jeopardize prospects for economic recovery for years to come.

The Indian economy which was slowing down since January-March 2018 due to draconian demonetization and flawed GST has been dragged into recession and morass due to the novel coronavirus pandemic. India has entered a technical recession in the July-September 2020. An economy is said to be in a technical recession when GDP growth is in negative territory in two consecutive quarters.

Provisional estimates reveal that GDP for the second quarter of the current fiscal shrank by a stunning 7.5 percent, following a historic contraction of 23.9 percent in the first quarter (April- March 2020). only has the economy shrunk for a second successive quarter, but also experiencing a recession for the first time in independent India’s history, In the past 69 years, India has seen negative growth in fiscals 1958,1966 and 1980 but not negative growth in two consecutive quarters.

While former chief statistician Pronab Sen says India’s, current macroeconomic situation is “very uncertain”, former RBI governor Subbarao said the GDP figure of the second quarter did not capture the impact of the COVID-19-induced distress of the informal sector. It means, if captured, GDP might have contracted by a bigger margin. This is a stinging reminder of how much was lost in such a short period. According to a report by SBI Research, India’s economy will take almost 7 quarters from January-March 2021 to reach the pre-pandemic level in nominal terms, and there will be a permanent output loss of around 9 percent of GDP.

Just 1 percent of GDP decline means about Rs 2 lakh crore of reduced national income. A 9-percentage point reduction would imply shrinkage of income by Rs 18 lakh crore for 2020-21. Hence, an unrealistic statement on economic recovery is made to mislead people, hide the grim reality, and camouflage the failure of government. Of course, it is the poorly planned lockdown and lack of proactiveness that made things worse for India leading to the destruction of many lives and livelihoods.

If all countries are affected during an epidemic, the government or ruler of one country will be said to be more efficient if his country is less affected than other countries and when various measures are taken that government spends more as proportionate to GDP. Of the top 10 economies, India has performed the worst in both quarters. In the April-June 2020 quarter, GDP declined in France (-18.4 percent), Italy (-18.4 percent), the UK (-21.5 percent), the eurozone (-18.5 percent. Australia (-1.5 percent), the United States (-9.0 percent), Japan (-10.3 percent), Sweden (-4.9 percent), Indonesia (-5.6 percent), while in India (23.6 percent) is compressed. In China alone, the positive growth rate was 3.2 percent.

Similarly, India is lagging behind other countries in the second quarter too. GDP shrinkage in the July-September 2020 quarter, in France (-3.3 percent), Italy (-4.6 percent), the UK (-4.7 percent), the Euro area (-4.6 percent), Australia (-5 .3 percent), the United States (-2.6 percent), Japan (-5.7 percent), Sweden (-4.1 percent), Indonesia (-3.7 percent, while India has -5.5 percent. In China alone, the growth rate was 6.7 percent. The government has announced that it will pay 15 percent of the GDP for its financial package. But in terms of government spending, it is 10 to 15 percent of GDP in the world, while it is only 2.5 percent in India.

Actually, whatever little improvement is witnessed in some indicators is not due to the government’s effort but owing to pent-up demand. So, when the unlocking process started, the restriction lifted, we witnessed some improvement in some indicators due to rising in pent-up demand. But this is not sustainable for a long time as there is the massive decline of jobs and erosion of purchasing power of people.

If all countries are affected during an epidemic, the government or ruler of one country will be said to be more efficient if his country is less affected than other countries and when various measures are taken that government spends more as proportionate to GDP. Of the top 10 economies, India has performed the worst in both quarters. The government has announced that it will pay 15 percent of the GDP for its financial package. But in terms of government spending, it is only 2.5 percent in India as against the world average of 10 to 15 percent.

It is not only the GDP that has been contracted but also the economy is sliding into stagnation, and hurtling towards cataclysm. Indian economy is in grip of stagflation- a combination of inflation and low growth, a decline of jobs. The Wholesale Price Index-based inflation in India rose to a nine-month high to 1.55 percent in November. The retail inflation in India had touched 7.61 percent in October, declining marginally to 6.93 percent in November, still much above the RBI’s comfort zone of 2 to 6 percent, set by the RBI. For the last 10 consecutive months, consumer inflation is above 6 percent. This indicates a fragile situation. The rate of price rise in vegetables and potatoes remained high and unaffordable. Unfettered increase in petroleum prices has exacerbated the situation

According to CMIE ‘s report, the unemployment, which had touched a record peak of 27.1 percent in the week ended 3rd May had declined after lockdown being lifted and 6.75 percent on 4th December has increased continuously to touch 9.8 percent (rural:10.28 percent urban: 8.28 percent) by 27 December as against 7.60 percent in December 2019. Both contractions in imports and exports show a decline in trade and imports declining faster than exports in present times shows the contraction of consumption and demand.

The Core sectors’ output falls 2.6 percent in November compared to a decline of 0.1 percent in September this year. Out of the eight sectors, only coal, fertilizer, and electricity showed positive growth, while production in crude oil, natural gas, steel, refinery products, and cement remained in negative territory. On the other hand, even as the growth outlook has improved, the decline in Government expenditure has been quite significant to Rs 3.62 lakh crore in July-September 2020 from Rs 4.86 lakh crore in April-June 2020. India’s estimated tax revenue may fall short of Rs 4 lakh crore and fiscal deficit is likely to exceed 8 percent of GDP and the debt -GDP ratio may climb to 90 percent from 72.2 percent in 2020-21.

Consumer spending, the most important component of aggregate demand in the economy, has shrunk by 11.5 percent in the second quarter. According to the Reserve Bank of India, credit growth has been only to the extent of about 5 percent despite a number of schemes announced by the finance ministry and the RBI regarding soft loans available for businesses. Since March, RBI has reduced the interest rates by 1.15% and infused liquidity. But it has resulted in rising in inflation and a reduction of interest repayment liability of corporates. This has decimated the savers as real interest on their savings is in negative territory

Education is essentially activity but schools, colleges are yet to be opened and youth are under severe, mental strain. The destruction of human capital is so massive; gigantic cannot be recovered in near future. Azim Premji University had released the findings of its survey carried out between 15 April and 15 May to understand the impact of the lockdown on livelihoods, and access to government relief schemes.

Around 66 percent of workers lost jobs, 77 percent had said consuming less food than before the lockdown. The report released by the Right to Food Campaign, along with a number of other networks on December 9 reveals that two-thirds of around 4,000 vulnerable and marginalized populations surveyed across 11 states stated the quantity of food they consumed either ‘decreased somewhat’ or ‘decreased a lot’ compared to before the lockdown.

Consumer confidence remained very low in November 2020 compared to a year ago, as reflected in the Current Situation Index (CSI), as per Reserve Bank of India’s (RBI) Consumer Confidence Survey. The weak confidence is attributable to consumer sentiments on the general economic situation, employment scenario, price levels, and household incomes.

A lot of discussions are going on on the invention of vaccines but nobody talks about vaccine for poverty, hunger, starvation, unemployment, and inequality which is within the capacity of governments. Herculean efforts are made for vaccines because Covid-19 affects rich, powerful more. The challenges of fighting poverty, hunger is intensely intertwined and so must be addressed.

 

 

 

The author is an Odisha-based eminent columnist/economist and social thinker. He can be reached through e-mail at [email protected]

 

DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of Sambad English.